About Sat, 07 Jan 2006
Trading Error at BSE, India
Another new listing, another country, another trading error and a strange resolution. It is much smaller than the Mizuho trade that I have blogged about here and here. But its resolution is utterly strange.
On listing day a trader placed a sell order for about 400,000 shares of Tulip IT Services Limited at a price of Rs 0.25 at the BSE in Mumbai when the market price was around Rs 170. Since circuit filters do not apply on listing day in BSE, the trade executed causing a modest loss of about US $ 2.6 million.
What is interesting is the way that the exchange has resolved the issue. It says that:
- The buy orders at a price higher than Rs.96/- and matched against the said order, shall be deemed to have been transacted at such prices at which the trades were executed. The cut-off price of Rs.96/- has been arrived at by applying circuit filter limit of 20% on the issue price of Rs.120/- on the lower side on the lines of the existing practice of application of standard Circuit Filter of 20% in the regular market.
- All other existing orders below Rs.96/- and which got executed against the said sale order will be deemed to have been transacted at a price of Rs.171.15. The said price of Rs.171.15 has been arrived at by taking the weighted average price of the trades executed at or above Rs.96/- against the said sale order.
- All other orders placed subsequent to said sale order and which were matched against the said sell order will be deemed to have been transacted at a price of Rs.171.15.
In response my first Mizuho blog, Piyush Mishra commented that an erroneous trade is due to “the lack of oversight on the part of the broker/dealer” I agreed with that and wrote that “By nullifying erroneous trades, exchanges may actually be reducing the incentives for traders to install and use such software checks.”
I have therefore little sympathy for the BSE bailing out the offending trader by changing the traded price at all. But putting that objection aside for the moment, the solution adopted is still perverse. A trader who bought at Rs 97 pays Rs 97 while another who bought at Rs 95, is asked to pay Rs 171.15. That two traders in very similar situations are treated so differently is manifestly absurd and unfair. That the person who bid a lower price pays higher makes the solution even more ridiculous.
I recall a similar situation in the US in 2001. A hedge fund offered to buy Axcelsis Technolgies at $95 instead of $9.50 on the Nasdaq. Nasdaq cancelled all trades at prices below an arbitrary threshold of $22 and let the other trades stand. Floyd Norris wrote (“At the Nasdaq Casino, the Winners Get Stiffed”, New York Times March 2, 2001) about a day trader who sold into the erroneous trade and then covered his short position at a profit of $145,908. When the Nasdaq cancelled the trades selectively, this trader found that his share sales had been cancelled while his purchases stood producing a loss of $130,065 instead of the profit of $145,908. That the offending hedge fund was bailed out while an innocent day trader was penalized was clearly absurd. In a scathing comment, Floyd Norris wrote ”Nasdaq looks a lot like a casino that values a customer's business only until he starts winning.”
Clearly exchanges can not be trusted with the discretion that is vested in them. The rule should be very simple. Traders should bear the responsibility (and the losses) of their erroneous trades.
Posted at 17:17 on Sat, 07 Jan 2006 6 comments permanent link
Comments...
Ravi Purohit wrote on Sat, 07 Jan 2006 23:39
Re: Trading Error at BSE, India
Sir,
Do these instances happen because there is an option on the BSE/NSE screens to buy/sell at market price. As in, one does not have to put it any quotes, the system itself matches buyers and sellers. So in a case where if I am a smart/wicked trader - On the first day of trading I enter a buy order at some ridiculous price hoping that some investor/trader would put his sell order at market price too. And it that were to happen, then I would walk away with a rogue trade. Is this the way it works ? And, if yes, would it be better if create systems that do not allow people to make such errors, ie. to say that - Not have an option to sell at market price on the BSE/NSE terminal, instead you put your price to buy/sell and the system than tries to match your order with others.
Regards, Ravi Purohit.
Prof. Jayanth R. Varma wrote on Mon, 09 Jan 2006 13:29
Re: Re: Trading Error at BSE, India
No. The problem does not arise from the presence of market orders. People who see a very attractive bid or offer will gladly put orders on the opposing side. Even if that does not happen, the erroneous order can execute against limit orders that may be present in the system.
Sandeep Parekh wrote on Mon, 09 Jan 2006 23:29
Re: Trading Error at BSE, India
Actually I weakly support the action of the BSE. I can think of two reasons why the order was placed. a) data entry error - TSE style b) a disgruntled employee punched in the order to get even with his broker employee. I don't see any economic case for manipulation.
In either case, I do have sympathy for the broker and would support unraveling of at least some of the contracts. The absurdity pointed out can be reduced by replacing Rs. 171 with Rs. 96 along with a right to the buyer to walk away from the contract. Since current price is around Rs.200 nobody will walk away. This still leaves a big hole in the seller's pocket, but seems more equitable, at the same time creating sufficient disincentive to enter incorrect trades.
From a future perspective, there needs to be some form of dummy filter system, so that prices are allowed to move freely on the first day within a band at any given point of time.
Prof. Jayanth R. Varma wrote on Tue, 10 Jan 2006 12:47
Re: Re: Trading Error at BSE, India
I have two problems with this view.
First, the solution appears to work only because the post interverntion price happens to be high. Having established a precedent here, the BSE may well be under pressure to intervene in future too when the behaviour of the post intervention price is very different.
Second, only trades against the erroneous order are impacted by the BSE intervention. We have to consider the possibility that some limit orders and market orders may have executed against each other at a price depressed by the execution of the wrong order. Some of these might even be profit booking by those whose orders executed against the erroneous order. If the price of one of their transactions is changed and the other is left unchanged, there is a problem and the option to walk away is not a solution.
Finally, I would like to point out that the logic of your comment on IPO frauds ("it is so ridiculously easy to detect this problem") applies to this case as well. It is so easy for a trader to apply shadow price bands and reasonableness checks in software before firing the order to the exchange.
Sandeep Parekh wrote on Wed, 11 Jan 2006 01:49
Re: Re: Re: Trading Error at BSE, India
Actually the solution works even if the price happens to be low. If the price is say Rs. 50, then the buyer will walk away (claim rescission) from the contract and buy from the open market instead of buying at Rs. 96.
With the additional complication in your second para, things look differently. If the price is below Rs. 96 post intervention, walking away may create the second problem you have pointed out, so you are right, it's not a satisfying solution.
Here is how I came to the conclusion that you are right:
Regarding the second point, given my solution, the buyer gets to buy at 96 or walk away. He will walk away only if the post intervention price is below 96. Now if he has already sold his highly profitable (or so he thought) purchase the following scenarios are possible: Bought at: Rs. 1 Sold at: Rs. 70 (profit booking) Intervention gives him two options: purchase at 96 or walk away. If he buys at 96 (because of higher price in markets) he suffers a loss of 26
If he buys at 80 (if that is the current price) then he walks away and buys from the market (to minimize his loss) and still faces a loss of 10.
Only if the market price is below 70 will he be able to make profit.
Clearly, this outcome seems to be unfair, so I agree with you given that it is the consequence of someone else's mistake. But I still feel bad about the broker who entered the order wrongly :)
Sandeep
Jodhbir wrote on Thu, 14 Dec 2006 21:04
Re: Trading Error at BSE, India
Sir, Instead of totally removing the circuit filters on the opening day for an IPO the exchange should have more intelligent filters. Instead of having a stiff upper/lower circuit the filter should be able to see the trend of movement of stock price. The errorneous price could then be blocked. In any case stiff circuit filter don't make sense and the way BSE resolved the issue is also absurd.
